5 Reasons why investing in Pongamia is not like Teak. Our answer to a common comparison
A brief history of Teakwood investments
From about 1995 to the early 2000s, thousands of private individuals from the Netherlands, Belgium and the United Kingdom invested approximately €450 million in South American teak plantations from parties such as Goodwood and Amazon Teak Foundation (ATF).
With slick brochures and expensive advertising on television, potential investors were enticed to ‘invest’ in Teak plantations. They were promised a sustainable investment and high returns of 10% or more per year. Both the sustainable character and the promised returns failed to materialize. Only a tiny part of the money raised was used to plant trees. What happened to the rest of the funds remains unknown to this day. It simply disappeared, but where it went, hardly anyone knows; many of the fund managers worked alone, and there was no supervision of the money flows within the company.
We notice the legacy of these events. Investors have become afraid of investing in forest products and regularly compare Teak and Pongamia. This comparison is incorrect. This blog will give five reasons why to eliminate this unwarranted association once and for all.
1. Teakwood is not really sustainable
Besides reforestation, sustainable investments often lie in CO2 storage or compensation. Trees convert CO2 into oxygen and biomass. Especially during the growth process, the CO2 is stored in the increasing biomass of the tree. When the trees are cut down or rot away, the carbon in their trunks is rereleased as CO2. The storage of CO2 in Teak trees is thus temporary. After all, felling is the end goal, and the lifespan of teak products such as garden furniture or wooden posts is not infinite. We admit that planting any type of trees is better than not doing so, but unfortunately, the Teak business is not really sustainable.
2. Teakwood works with felling yields rather than harvesting yields
As explained above, Teakwood investments thus work with felling yields. Corekees works with harvest yields. In terms of return, this can be similar (depending on the project and the provider’s reliability), but the difference is in the payout frequency. Corekees’ return comes from the nuts of the tree. These nuts are harvested – starting 3 to 4 years after planting – annually, after which the harvest proceeds are also paid out annually. With Teakwood investments, investors have to wait for the harvest proceeds. Generally, this takes many decades. In that time, a lot can happen.
3.We do use contracts
In the Goodwood and ATF bankruptcies settlement, it emerged that there were no contracts between Floresteca, the Brazilian forester, and the Dutch manager. This led to Floresteca not paying out any money because, according to the Brazilian forester, the overhead and plantation management cost a lot of money. To prevent this kind of drama and to ensure clarity and transparency, Corekees does have a Service Contract with our forestry partner Investancia. This contract was carefully drawn up and checked by the reputable law firm DeBrauw from Amsterdam.
4. We agree on a realistic price in advance
At the time of logging, the wood from Goodwood and ATF turned out to be of inferior quality. As a result, the promised returns could not be paid out. Teak of the highest quality needs to grow long-term (sometimes more than 60 years!) and slowly and be properly maintained during that time. Sometimes, the wood on the Goodwood and ATF plantations was planted on the wrong type of soil and barely given time to grow quietly. In their calculations, however, these suppliers had assumed high-quality teak with high selling prices. As so often, the reality was more stubborn than theory. We have chosen to sell the nuts from our trees for a fixed price per kilogram. We have laid this down in a purchase contract. This way, we don’t always get the most out of it, but we are sure of a guaranteed purchase at a price agreed in advance. Because we know how many kilograms of nuts one tree produces on average, we can make very specific and realistic price forecasts. We, in turn, use these predictions in the yield calculations. At the Goodwood and ATF teak plantations, the felled trees were laid down by the side of the road, after which the Brazilians used a rough estimate to determine the value of the wood pile.
5. Corekees is transparent about its fees
The management fees for the Goodwood and ATF boards were unclear and very high. In contrast, our management fees and overhead are very transparent. Of every €20 you invest, 34% is used to pay Corekees overhead costs. In addition, we have a management fee of 5%. The remaining 61% is used to purchase the trees, plant them and maintain them for the first four years. In calculating the return, we have already deducted the expected costs. The expected annual return of 7.8 to 8.5% is achieved after deducting all expenses, and our success fee of 5% is linked to the actual result achieved. If you don’t get paid, we don’t get paid either!
In contrast to Teak, our Pongamia trees derive their financial value not from the wood they consist of but from the nuts they bear. This means that we do not cut down the trees and take good care of them. The sustainable character is guaranteed because the trees remain standing for a long time (there are Pongamia trees over 100 years old that are still carrying nuts).
The financial part of our proposition is better. For the profitability calculation, we use a purchase contract with a fixed price per kilogram of nuts. This guarantees us that nuts will always be sold. Finally, we are transparent about rates and fees and are in the same boat as our investors.
Have you become curious about Pongamia’s opportunities, and would you like to learn more about our project in Paraguay? Then download the information brochure or contact us directly. We will be happy to assist you!